Is the Obama Administration Getting Serious About Executive Compensation? (No.)

I've not dug deeply enough into the administration's new financial compensation proposal to have a really strong opinion on the matter, but it certainly doesn't look like much. Put simply, it gives investors a bit more authority to organize "advisory" votes expressing disapproval on pay packages and sets a couple of rules gesturing at the importance of independent pay committees.

Weak sauce. Baseline Scenario blogger James Kwakagrees. Indeed, he thinks this is part of a larger trend:

The administration has decided that the economy depends on the banks and therefore it needs to keep the existing bankers happy. Or it has decided that executive compensation is just not such an important issue, and it would rather focus on others. (What, though? The Wall Street Journal reported on Tuesday that the administration is backing off plans to consolidate regulatory agencies.) Or, more likely, both.

These are reasonable positions, even if I don’t agree with them. But they are more evidence that the financial sector of 2010 will look more like the financial sector of 2006 than anyone would have thought possible just six months ago.

Law professor Brett McDonnell, meanwhile, has some ideas for how to craft a more effective approach to executive compensation, and, for that matter, the economic oligarchy that it's birthed.

Could it simply be that the problems in the finance industry are not ones Obama really wants to solve. Put another way, they present opportunities for many things beyond fixing the finance industry, and Obama is more interested in some of those other things, like health reform. Despite his amazing super-human powers, there are limits to the number of things he can do. He cares more about some than others.

Shareholders already have great insight into pay based on proxy statements. Granted, these read like propaganda and are created by a parasitic executive compensation industry. But transparency isn't the problem - the problem is Board members who either suffer from loyalty or care concerns. For sectors without negative externalities to failure (in other words, non-financial sectors), increased shareholder activism in choosing competent Board members should solve this problem. With the financial industry, further regulation is needed. We should be very careful about this though. The Clinton-era amendment to IRC 162(m) helped create the principal/agent problem of option pay to begin with. I certainly disagree with McDonnell's crude solution that we should simply tax higher calendar year income at higher rates. My general preference would be to require that options vest over a 20 year period, to encourage long-run concern for financial solvency so that simple volatility is not rewarded as much.